The first half of the year came to a close with the S&P 500 down 6%, global stocks down 10%, oil down 5%, Chinese stocks down 27%, the euro down 14%.

What was up? Gold. Plus 13%.

There are two major pieces of unfinished business in the markets. Stocks have still not completed their bear market drop. Gold has not fully realized its bull market either.

Typically, markets move from excess to excess, passing sensible prices like a cross-town bus crossing main street. Back and forth, from over- valued to undervalued…and then back again. And passengers tend to get off on the wrong end!

Gold was very cheap at $260 in 1998. It will be very expensive sometime in the future. Perhaps at $2,600?

Stocks were very expensive when the Dow was at 14,000. Where will they be very cheap? At Dow 6,000? Or Dow 3,000?

We don’t know. We don’t even no for sure what direction the markets are heading. All we know is that we’re somewhere between the top and the bottom. And gold seems to be heading up while stocks seem to be heading down. Until they’ve run their course, only a fool would bet against these trends.

And here’s another trend we wouldn’t bet against. Government debt is going up. In the US, the national debt is now officially at its highest level since WWII.

Yesterday, a film crew caught up with us on the banks of the Thames and posed the question:

“What’s the big deal about debt? The US had as much debt after WWII. The next years were among the best the country ever had…”

We sat at a sidewalk eatery near the river, with a camera focused on us. People walked by and stared. They figured we must be somebody. They looked disappointed when they couldn’t place us.

“The big deal is that we’re going broke,” we explained. “Until very recently debts of this magnitude were always associated with war. From time to time countries went broke. But they almost always did so because of emergency expenses driven by war. In other words, they were spending money for what looked like a very good reason – self preservation.

“For the first time in history, almost all the developed nations of the world are running regular, structural deficits. They’re going deeper and deeper into debt, as though there were a war…but there is no war.

“We have emergency budgets, but no emergency. You may think that they are fighting the emergency of a recession or the threat of a depression, but you would be wrong. Most of the deficits have little to do with stimulus or bailout efforts. They are just the ordinary results of social welfare programs that have gotten out of control.

“For the first time ever, countries are going broke just in the normal course of business. Without an emergency.

“The nice thing about WWII is that it came to an end. But there is no victory in the fight against old age. The pension burden won’t go down. It will go up. There is no VE day for national health programs. There are no tickertape parades…the troops are never de-mobilized and sent home…and the spending never goes down.

“We can never pay off the debt, in other words, because the debt never stops growing.

“National leaders at the G-20 conference over the weekend pledged to bring their deficits under control. Some governments are taking this seriously. The government of Britain, under David Cameron, seems to have the right idea. But we are still waiting to see what happens next.

“The modern welfare state was only invented about 150 years ago. The Romans tried it and it didn’t work out very well. The modern version is still an experiment.

“And currently, in America, there are more people getting money from the government than there are people paying taxes. Forty million people get food stamps. Millions more depend on federal tax credits and so forth. Still others have jobs that are either paid directly by the government or by a contractor for the government.

“All these people have the right to vote. Which is a shame. Because they are likely to vote for more social welfare spending. Then, governments will go broke.”

Yes, dear reader, the welfare state is another piece of unfinished business. So is the dollar-based monetary system. Both of them are approaching the end of the road.

And more thoughts…

A letter from a dear reader, about a letter to the editor:

Last week Bill Bonner wrote, in The Daily Reckoning, a piece about UK pensioners and BP (the oil company whose oil is spilling into the Gulf of Mexico and whose share price in consequence has been shredded.)

Bill Bonner based his piece on a letter that he had seen in the British newspaper, The Financial Times. That letter was written by me, Angus Palmer.

My point in writing the letter to The Financial Times was to say that pensioners who are shareholders in BP are losing out. I pointed out that the directors of BP had agreed to give Barack Obama a sum of $20 billion to spread amongst the folk in the South of the United States, although there is no legal obligation for BP to do this. I pointed out that this largesse is at my and other pensioner shareholders expense.

However I have not been a BP shareholder very long. Another correspondent to The Daily Reckoning [UK edition] is Theo Casey. Theo Casey believes that BP is a good investment and I bought shares in BP only four or five weeks ago partly at the instigation of Theo Casey.

I thought Mr. Bonner might appreciate the irony that he took up the cudgels in his column to defend a poor British pensioner stiffed by what he calls “the zombies” when in fact the pensioner in question was partly led astray by The Daily Reckoning, of which I am a keen reader.

Bill Bonner reply: Well, BP must have seemed like a good buy at the time…that is, before the rig blew up in the Gulf.

BP had its disaster in the worst possible place. The Gulf coast is practically the home of America’s tort law zombies – the fastest-moving of the species. Down there, suing big business is not just a profession; it’s a lifestyle and a culture. Tort lawyers compete for bragging rights as well as money. They get together in country clubs and tell each other how much money they made. Zombieism is a matter of pride as well as money. Even the worst of them deserve Oscars for their courtroom histrionics. The best go on to buy sports teams. Right now, every one of them within a hundred miles of the coast must be designing a new beach house.

*** Last night, we had dinner at our favorite club, with our old friend Lord Rees Mogg and a new member of parliament, his son Jacob.

Jacob:

“The developed economies are in very deep trouble. In Britain, the new government seems to be doing the right things. But it will be very hard. They’re planning to cut an amount equal to about 1.5% of GDP each year for the next 5 years. This has never been done before. These cuts are much greater than those made by Maggie Thatcher.

“On the other hand, the emerging economies seem to be very well positioned. They can turn their production towards meeting domestic demand and grow at high rates for decades. The next few years may be difficult. But the long run looks very good for them.”

*** It may be worth having a look yourself, dear reader. Our old friends Barb Perriello and Karim Rahemtulla are leading a tour to India, which Karim considers “the world’s best emerging market.” Details available here: